Friday, February 10, 2012

Chelsea - Look Good In Blue?

After Chelsea announced their financial results for the 2010/11 season, analysts could be forgiven for regarding them with a somewhat jaundiced eye, as the club once again put a positive spin on the figures. While they emphasised the record turnover and the improvement in the bottom line, the fact remains that this was another thumping great loss of £67 million, a long way short of the much promised break-even. So, move along, nothing to see here.

But hang on a minute, this time there are genuine signs that the club may be finally moving in the right direction, at least off the pitch. Although these figures may be nothing to write home about, they do include some good news: revenue has grown by a healthy 8%, while operating expenses have been cut by 5% (including the wage bill by 3%). Not only that, but these accounts include £42 million of exceptional costs and if these were excluded the loss would have been “only” £26 million, which would have represented an impressive £45 million improvement on the previous year.

That said, Chelsea still face a number of daunting challenges. By their own high standards, last season was something of a disappointment, as they finished second in the Premier League behind Manchester United, who also eliminated them in the Champions League quarter-final. That would obviously be considered more than acceptable by most fans (and owners), but it felt like a let down after the previous year when the Blues secured their first ever league and cup double.

"I can't explain"

As a result of this backward step, Roman Abramovich dispensed with the services of Carlo Ancelotti, replacing him with the talented young manager André Villas-Boas, who had been so successful with Porto. Although managing Chelsea may seem like a dream role, AVB has the difficult task of rebuilding and rejuvenating an aging squad with stalwarts such as Didier Drogba, Frank Lampard, Florent Malouda, John Terry and Ashley Cole now all the wrong side of 30.

At the same time, he has been asked to get the team playing attractive football, while still competing for the major prizes. Oh, and he also has to find a way to get Fernando Torres scoring again. Whether he is given more time for this project than his numerous predecessors is far from certain.

All this needs to be achieved against the backdrop of the imminent implementation of the UEFA Financial Fair Play (FFP) regulations, which will significantly restrict Chelsea’s spending capacity. This will require a major change in the club’s strategy, which has essentially been to invest substantial sums in the squad, leading to large losses that have been covered by the owner. From now on, the Blues will have to live within their own means.

Although they have not been spending at the same levels as the early years of the Abramovich era, they have still been among the most active in the transfer market. A year ago, they surprised everyone by splashing out more than £70 million on Torres and David Luiz, while they spent nearly as much last summer, largely on Juan Mata, Raul Meireles and Romelu Lukaku.

Nevertheless, the club remains confident that they will meet the new rules, “We are well aware of our obligations under the UEFA Financial Fair Play rules and expect the current year’s profit to show a significant improvement.”

The profit will indeed have to improve a lot more than this year, as the pre-tax loss fell by just £3 million from £70 million to £67 million, though this would have been much better without those pesky exceptional expenses of £42 million. At an operating level, the picture is actually a fair bit healthier, as the loss (excluding exceptionals) has been reduced from £70 million to £44 million, due to revenue rising £16 million and costs falling £9 million.

Clearly, that’s still a large loss in anybody’s language, but it represents definite progress, as seen by the EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) being positive (£4 million) for only the second time since Abramovich’s arrival. There is a warning sign from player amortisation, however, as this has started rising again after many years on a declining trend.

On the other hand, Chelsea recorded a solid profit on player sales of £18 million, compared to a £1 million loss last year, mainly due to selling Ricardo Carvalho to Real Madrid, Miroslav Stoch to Fenerbahce, Michael Mancienne to Hamburg and Franco Di Santo to Wigan.

On the face of it, there has been little improvement in Chelsea’s financials since they cut their loss from the astonishing £140 million in 2005 to £80 million in 2006. In the five successive years, the pre-tax loss has fluctuated in a narrow band of £66-75 million with the exception of 2009, when the shortfall was down to £44 million. At the time, that had seemed to indicate that the club was steadfastly approaching the elusive break-even, but the following two years returned to previous levels.

However, if exceptional items are excluded, the underlying trend is clearly favourable, except for the blip in 2010, as can be seen by the red columns in the above chart. As the club said, these “had a significant impact on the size of the losses” in 2011 coming from: (a) £28 million – £15 million termination payments for Ancelotti and his staff plus around £13 million compensation to Porto for AVB; (b) £7.4 million – impairment of player registrations; (c) £6.4 million – payments to HMRC to settle the industry wide investigation into taxation of image rights.

Although the severance payments are described as “exceptional items” in the accounts, it’s actually pretty much business as usual for Chelsea, as they have made such payments in three of the last four years (£23 million in 2008, £13 million in 2009 and £28m in 2011), costing them an amazing £64 million to rid themselves of a succession of “failed” managers: Claudio Ranieri, Jose Mourinho, Avram Grant, Luiz Felipe Scolari and Ancelotti. That’s a staggering amount, especially if you consider how successful Mourinho has been since leaving Stamford Bridge.

It might be overly simplistic, but if Abramovich can resist the temptation to continually pull the trigger on his managers, then the club’s financials could well improve to a level that will conform to the FFP guidelines.

Even so, Chelsea’s financials are still a fair way off matching most other top clubs in the Premier League. Of the “Sky six”, three clubs reported profits for the 2010/11 season (Liverpool have yet to publish their accounts) with Manchester United leading the way at £30 million, followed by Arsenal £15 million and Tottenham £0.4 million.

Of course, Chelsea’s loss of £67 million is considerably lower than the record-breaking £197 million posted by Manchester City, but to a very large extent City are simply emulating the approach that Abramovich applied when he landed in West London.

Chelsea’s revenue growth last season was fairly impressive, especially considering that revenue at Arsenal and Liverpool was essentially flat. In fact, it has grown by 51% from £149 million in 2005 to £226 million in 2011. Note that I am using group turnover here (including a £3.3 million share of the digital joint venture’s turnover) to be consistent with the Deloitte Money League.

However, there is another way of looking at this. Apart from Liverpool, all of Chelsea’s major rivals have doubled their revenue or more in the same period. In particular, the gap between Chelsea and Manchester United has grown substantially from just £17 million in 2005 to more than £100 million in 2011. In addition, Arsenal’s revenue was £34 million behind Chelsea six years ago, but is now at the same level.

In fairness, Chelsea’s revenue is still the sixth highest in Europe, having closed the gap to fifth-placed Arsenal from £14 million to £1 million in 2011. That’s an impressive achievement, but the problem is that the shortfall against the top four clubs is widening, though that is partly due to exchange rate movements.

The Spanish giants, Real Madrid and Barcelona, generate almost double as much revenue as Chelsea at £433 million and £407 million respectively. Similarly, Manchester United earn over £100 million more with £331 million, while Bayern Munich’s revenue of £290 million is a handy £64 million higher.

It’s difficult to compete with these clubs with such a financial disadvantage, especially if you consider that they receive the benefit of that substantial additional revenue every single season.

Analysis of Chelsea’s revenue mix is quite telling, as only television has shown any meaningful growth since 2007 with the other two revenue streams contributing very little. Commercial income has barely budged with a tiny increase from £56.4 million to £56.7 million, while match day revenue has actually dropped by £7 million from £74.5 million to £67.5 million.

Clearly, part of the reason for the growth in TV money is success on the pitch, but the lion’s share is due to centrally negotiated higher contracts for the Premier League (and the Champions League). In this way, broadcasting income jumped in both 2008 (from £60 million to £77 million) and 2011 (from £86 million to £101 million), which coincided with the new three-year Premier League deals.

Consequently, Chelsea’s Premier League distribution rose by £4.9 million from £52.8 million to £57.7 million in 2011, despite finishing one place lower than the previous season, largely due to the much higher payments for overseas rights.

Each club gets an equal share of 50% of the domestic rights (£13.8 million) and 100% of the overseas rights (£17.9 million). However, facility fees (25% of domestic rights) depend on how many times each club is broadcast live with £11.6 million for Chelsea, based on 22 games. Finally, merit payments (25% of domestic rights) are worth £757,000 per place in the league table, giving £14.4 million to Chelsea.

The equitable nature of the distribution methodology means that there is not a huge difference between Premier League payments to the leading clubs, but competing in the Champions League can make a big difference. That can be seen by looking at the TV money received by the leading English clubs last season, where the advantage enjoyed by those teams participating in Europe’s flagship tournament is clearly evident.

That was particularly the case for Chelsea, who received €44.5 million (around £39 million) last season, the third highest in Europe, up from €32.6 million in 2009/10. This comprises €7.2 million participation (awarded to every team that plays in the group stages), €10.3 million performance bonus for reaching the quarter-final and €27 million from the TV (market) pool. Eagle-eyed observers will have noted that the allocation for the TV pool is higher than the other English clubs (Manchester United €25.9 million, Arsenal €16.6 million and Tottenham €14.4 million).

This is because of the methodology used to allocate this element, which is as follows: (a) Half depends on the position that the club finished in the previous season’s Premier League with the team coming first receiving 40%, second 30%, third 20% and fourth 10%. As Chelsea won the 2009/10 Premier League, they received much more than the others. (b) Half depends on the progress in the current season’s Champions League, which is based on the number of games played. So Chelsea received more than Arsenal, as they got a round further, but less than Manchester United who reached the final.

This highlights the importance of the Champions League to Chelsea’s business model, as they could ill afford to lose £40 million TV revenue. Although this could be partially mitigated by the Europe League, this is a lot less lucrative financially. For example, last season Liverpool and Manchester City only received €6.1 million for their Herculean efforts in Europe’s junior competition, while the highest prize money was the €9 million awarded to Villarreal. From a financial perspective, it does provide some compensation via additional gate receipts, but it really is the poor relation of the Champions League.

Perhaps the most disappointing aspect of these accounts was the lack of growth in commercial income, which was virtually unchanged at £56.7 million. This is only just over half of Manchester United’s £103 million and miles behind the likes of Bayern Munich (£161 million), Real Madrid (£156 million) and Barcelona (£141 million). More pertinently perhaps it is also £20 million lower than Liverpool, who have not competed in the Champions League for a couple of seasons.

Even though the club said that this revenue had “held up well in the face of the continued economic turbulence faced by the wider economy”, much more was expected here after the reported large increases in the deals with the shirt sponsor deal and the kit supplier.

In October 2010, they signed an eight-year extension of their kit supplier deal with Adidas, which reportedly increased the annual payment by £8 million from £12 million to £20 million with some accounts suggesting that the new agreement could be worth as much as £25-30 million. Similarly, the club agreed a new deal with shirt sponsor Samsung, which apparently increased the annual fee by £4 million from £10 million to £14 million.

So, theoretically, there should have been an increase of £12 million in Chelsea’s commercial income, but that clearly has not happened, suggesting that the reported numbers were either inaccurate or the timing was wrong. It is also possible that these larger sums are linked to more success on the pitch.

If they are correct, it would mean that Chelsea have the seventh most lucrative shirt sponsorship deal globally, though it’s still a fair way behind the £20 million earned by domestic rivals Manchester United (Aon) and Liverpool (Standard Chartered), though Barcelona’s £25 million deal with the Qatar Foundation has raised the bar again, as has the purported £20 million agreement that Manchester City have with Etihad.

"Blondes have more fun"

Similarly, Chelsea’s kit supplier deal would be very impressive at £20 million, though it’s still below the £25 million paid to Manchester United and Liverpool by Nike and Warrior respectively.

The holy grail for Chelsea would be naming rights for their stadium with analysts estimating that this could be worth up to £10 million a year, but to date they have failed to attract a serious bid, despite chief executive Ron Gourlay announcing that the club was looking to find a sponsor over two years ago. However, Gourlay appeared unabashed at the International Football Arena in Zurich last November, when he said, “Active conversations are going on with blue chip partners and I am confident we will have naming rights at Stamford Bridge within the next six to eight months.”

That is easier said than done (not just for Chelsea), especially when the naming rights are intended for an existing stadium, but Abramovich may well be observing whether Manchester City’s Etihad deal is approved by UEFA, as it is not beyond the realms of possibility that a “friendly” partner could sponsor Chelsea in a similar manner.

Match day income of £67 million has been criticised for being on the low side, but only four clubs generate more than Chelsea: Real Madrid £112 million, Manchester United £109 million, Barcelona £100 million and Arsenal £93 million. However, they earn quite a lot more, so Chelsea’s average match day revenue of £2.5 million is still some way behind Manchester United at £3.7 million and Arsenal at £3.3 million.

Nevertheless, it’s not too bad compared to the vast majority of other clubs. For example, it is more than 50% higher than both Tottenham and Liverpool, even though Anfield’s capacity of 45,400 is larger than Stamford Bridge’s 41,800. However, the problem with an equation featuring a small ground that produces a lot of revenue is that Chelsea fans are paying some of the highest prices around.

Indeed, the prices for 2010/11 were hiked again, so that a £30 ticket was increased to £40, while a season ticket in the West Stand went up £70 to £900, though a number of prices were frozen. Gourlay defended the increase, “We believe the prices strike the right balance between the commercial needs of the club and value for money for fans.” Unsurprisingly, the Chelsea Supporters Group did not share this view, “Chelsea seem to think their supporters are recession proof – we’re not.” This unhappiness even led to a proposed boycott of the Champions League match against Genk.

"Bridge of Sighs"

Chelsea’s only realistic hope of matching the £100 million earned by United and Arsenal would be to move to a larger stadium. Chelsea’s chairman, Bruce Buck, pointed out that Stamford Bridge was only the eight largest stadium in the Premier League and 60th biggest in Europe.

More than that, the club is scared of being left behind by others’ developments, even though it is far from certain that Chelsea would be able to fill a 55,000-60,000 stadium. Even Buck expressed some doubts, “Maybe with digital media and whatever, match day crowds will stay flat or, who knows, even go down.”

The club paid £700,000 to two architectural firms to look at the possibility of expanding the Bridge, but both concluded that this would be unworkable and prohibitively expensive, even though the local Hammersmith and Fulham council is supportive.

"That's where I'm meant to be"

According to Buck, a new stadium would cost £550-600 million with Chelsea hoping to fund around a third of that by redeveloping Stamford Bridge. They wanted to facilitate this approach by buying back the freehold from a company called Chelsea Pitch Owners that had been set up many years ago to prevent the ground from falling into unfriendly hands. However, the club failed to convince the required 75% of CPO shareholders of their plans (though 61.6% voted in favour), so that avenue of funding has been closed – at least for the time being.

Chelsea’s preferred site appears to be Nine Elms, next to the famous old Battersea power station, and they have commissioned developers to study a possible move, despite the CPO setback. Other sites considered have included Earls Court, Olympia, White City, Imperial Wharf and even Wormwood Scrubs. Chelsea’s search is made more difficult by the lack of readily available sites in the local area and has been complicated by QPR’s new owner, Tony Fernandes, also talking about a stadium move in the vicinity.

Whatever happens, there would be many hurdles to overcome, including planning permission, and a new stadium would not be ready for many years, so this is very much future music in terms of additional revenue.

On the cost side, the wage bill was cut by 3% from £173 million to £168 million (£189 million in the accounts less £21 million exceptional items). Not only is this the first decrease at Chelsea for many years, but it is also the first time that any of the six leading English clubs have reduced their payroll since Manchester United in 2007.

In fact, this is the first season for ages that Chelsea have not had the highest wage bill in England, as they have been overtaken by Manchester City with £174 million. That said, they are still well clear of Manchester United £153 million, Arsenal £124 million, Liverpool £114 million (2009/10) and Tottenham £91 million. However, the gap has closed considerably since 2005, when Chelsea’s wages were miles ahead of the rest.

This is obviously great news, but we might have expected an even higher decrease following: (a) the departure of many senior players, such as Michael Ballack, Ricardo Carvalho, Joe Cole, Deco and Juliano Belletti; (b) lower bonus payments after Chelsea stated that performance bonuses had been cut and the performance was worse than the very successful 2009/10 season. In addition, the 2010/11 accounts only include around five months of wages for Fernando Torres and David Luiz, who were signed in the January 2010 transfer window.

"The Drog days are over"

However, it is clear that Chelsea are taking steps to lower their wage bill. The stubborn negotiations over Gary Cahill’s salary was surely a sign of things to come, as were the new recruits in the summer like Mata, Lukaku, Oriel Romeu and Thibaut Courtois, who all came in on relatively low salaries.

There are a number of high earners that will also be offloaded. In the last couple of months, Nicolas Anelka has joined Shanghai Shenhua, while Alex made the move to Paris Saint-Germain. In the summer, they are likely to be joined by Didier Drogba (who will be out of contract), Salomon Kalou, Florent Malouda, Paolo Ferreira and Jose Bosingwa. There are even question marks over the futures of Frank Lampard and John Terry, who reportedly earn £150,000 a week each.

Of course, these players will need to be replaced, but the point is that the new arrivals will largely be on lower salaries. There will be exceptions made for any top, such as Eden Hazard or Luka Modric, but on the whole the downward trend is clear.

Another interesting strategy here is the wide scale use of the loan system with Chelsea currently loaning no fewer than 11 of their players, including Yossi Benayoun (Arsenal), Josh McEachran (Swansea City), Jeffrey Bruma (Hamburg), Gael Kakuta (Dijon), Patrick Van Aanholt (Vitesse), and Courtois (Atletico Madrid). This is not only useful development experience, but also takes wages (or at least some of them) off Chelsea’s books.

Chelsea’s wages to turnover ratio has been held in a tight range between 70% and 75%, except for 2010 (82%), though this is still above UEFA’s recommended upper limit of 70%. It is also considerably higher than Manchester United (46%) and Arsenal (55%). On the other hand, it is a long way below Manchester City’s 114%. Interestingly, since 2006, wages have grown at exactly the same rate (48%) as revenue.

As an aside, directors’ remuneration has risen from £0.8 million in 2010 to £2.3 million in 2011, but it looks as if the previous year is the anomaly (linked to Peter Kenyon’s departure?), because £2 million was paid in both 2008 and 2009.

One area that Chelsea will need to keep an eye on is player amortisation, which rose from £38 million to £40 million. Admittedly, that is not a huge increase, but it is the first after many years of falling from the peak of £83 million in 2005 and does not include a full year for the expensive purchases of Torres and Luiz.

For non-accountants, amortisation is the annual cost of writing-down a player’s purchase price, e.g. Torres was signed for £50 million on a 5½ year contract, but his transfer is only reflected in the profit and loss account via amortisation, which is booked evenly over the life of his contract, so £9 million a year (£50 million divided by 5.5 years).

Since the accounts inform us that £65 million was spent on new players after the financial year-end, it is likely that this expense will further rise, especially as departing players are likely to carry low (or no) amortisation, because they have been at the club so long. At the moment, Chelsea’s amortisation is in line with most of the other leading clubs (Manchester United and Tottenham both £39 million, Liverpool £40 million), though the impact of radically different transfer policies is seen at the extremes of Manchester City £84 million and Arsenal £22 million.

This is the logical result of Chelsea’s need to rebuild the squad, as can be seen by their net transfer spend over the last few years. In the three years after Abramovich bought the club, they splashed out almost £300 million in the pursuit of trophies, but then the owner turned off the taps with only £10 million being spent in the following four years. However, he has one again dipped into his pocket in the last two seasons with net spend bouncing back up to £146 million.

It should be noted that the reported values of transfer fees are notoriously unreliable, so these numbers may not be 100% accurate, but the key conclusions are obvious.

At one stage, Chelsea were the only game in town when it came to big money signings, but the arrival of Sheikh Mansour at Manchester City has changed that. During his four-year tenure, City have spent nearly £400 million, which is significantly higher than any other English club, though it should be noted that Chelsea are also a fair way ahead of the pack with £150 million. To give that some perspective, that is £130 million more than Liverpool, Manchester United, Tottenham and Arsenal combined.

Following this expenditure, net debt has increased by £72 million from £20 million to £92 million. The vast majority of this has been funded by the club’s parent company Fordstam Limited (Stamford backwards, geddit?), which is Abramovich’s holding company, so this is not really a concern, especially as such increases in the past have been handled by converting debt into equity. Importantly, there is no external bank debt.

That said, it is not really true to say that Chelsea is debt-free, as these loans still exist in the holding company. They are interest free, but are repayable with 18 months notice. It must be considered unlikely that Abramovich would ever call in this debt, but it is theoretically possible. In the 2010 accounts, these loans stood at £739 million in Fordstam Limited, so this year’s debt increase in the football club debt implies that Abramovich has put in over £800 million to Chelsea.

At the moment Chelsea is clearly reliant on Abramovich for financial support, which can be seen by looking at the club’s cash flow. Operating cash flow has been consistently negative, though it did improve in 2011 to produce a cash outflow of just £5.5 million. This was partly due to the improvement in revenue and costs, but also owes a great deal to better working capital management. Without the exceptional items, there would have been a cash inflow for the first time in years.

However, this was before investment of £67 million, most of which (£61 million) was the net spend on new players, but also include £6 million on improving facilities at Stamford Bridge and the training ground at Cobham. That produced a cash outflow before financing of £72 million with the gap being almost entirely closed by new loans from Abramovich.

Unfortunately for Chelsea, this strategy will not work in the future, as UEFA’s Financial Fair Play (FFP) Regulations will ultimately exclude from European competitions those clubs that fail to break even.

The first season that UEFA will start monitoring clubs’ financials is 2013/14, but this will take into account losses made in the two preceding years, namely 2011/12 and 2012/13. In other words, the 2010/11 accounts are not considered, but those from the current season will be, so a rapid improvement is required.

However, they don’t need to be absolutely perfect, as wealthy owners will be allowed to absorb aggregate losses (“acceptable deviations”) of €45 million (around £38 million), initially over two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions. The maximum permitted loss then falls to €30 million from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount).

Chelsea seem quite confident of meeting the target per chairman Bruce Buck, “'The club is focused on complying with the requirements of UEFA's financial fair play regulations while maintaining its ability to challenge for major trophies. We would expect this to be reflected in our results for the current financial year.”

Although there have been a few false dawns at Chelsea, this time he has a point. If we exclude the £42 million of exceptional items (assuming that these are not repeated in the future) from the 2010/11 pre-tax loss of £67 million, the loss is reduced to £26 million.

For UEFA’s break-even calculation, Chelsea can also exclude certain expenses that are considered to represent positive investment, such as expenditure on youth development (£10 million) and community (£1 million) plus depreciation on tangible fixed assets (£9 million), which gives a total of £19 million to be deducted. Although youth development and community investment are not separately disclosed in the accounts, these values can be estimated based on similar reviews of other clubs.

That would produce a loss of just £7 million, which is well within UEFA’s guidelines – on the reasonably safe assumption that this would be covered by Abramovich.

If that’s not enough, there is a clause in the small print of the FFP regulations (Annex XI) that states that clubs will not be sanctioned in the first two monitoring periods, so long as: (a) the club is reporting a positive trend in the annual break-even results; and (b) the aggregate break-even deficit is only due to the 2011/12 deficit, which in turn is due to player contracts undertaken prior to 1 June 2010.

In other words, the wages of players signed before June 2010 can be excluded from the calculation, as long as their contracts have not been extended after that date. Ironically, this clause may prove to be of limited use to Chelsea if they sell many of their old timers this summer.

"Kiss like ether"

This time last year, I showed how Chelsea *could* improve their bottom line by £70 million, which is obviously much more than the £3 million they actually achieved. However, if we exclude the £42 million exceptional items (I explicitly assumed that Ancelotti would remain) and the £19 million FFP exclusions, then the difference is only £6 million, so the Blues are still on the right track.

Going forward, Chelsea have a number of opportunities to improve their financials – but they also face a number of challenges. This was summarised by Bruce Buck, “We have to up our sponsorship income, there's no doubt about it, and up our match-day revenues, reduce our transfer fees a bit, reduce our payroll a bit. I'm not saying the job we face is easy, it's difficult, but we have to do it.”

There really should be more money coming from sponsorship deals, including the elusive stadium naming rights, while ticket prices have already been raised with little discernible impact on attendances. A new stadium would represent a quantum leap in the club’s turnover (note: investment on construction costs could be excluded for FFP).

"Looking through Gary Cahill's eyes"

The wage bill is an interesting one. The likelihood is that this will fall, as younger players are signed on lower salaries, such as Kevin De Bruyne from Genk and Patrick Bamford from Nottingham Forest. However, this assumption could be blown out of the water if Abramovich loses patience with the pace of the squad rebuilding and splashes out on mega stars. This would also adversely impact player amortisation, which is almost certain to increase in any case.

The other major assumption is that Chelsea keep the faith with the AVB project. Although Buck has made all the right noises (“It has to be the right guy in the job for 10 or 15 years and… André might well be that guy”), it would not be an enormous surprise if he were to be dismissed at some stage, leading to yet another “exceptional” payment. Given the frequency with which these occur, UEFA would be unlikely to exclude such costs, as that would be seen to support the type of “hire and fire” behaviour that they would surely like to discourage.

Chelsea would hope that the substantial investment in their academy finally bears fruit. To date, this has not exactly been a glittering success, leading to the departure of Frank Arnesen, but great things are expected from Josh McEachran and other youngsters, such as Nathaniel Chalaboah, show promise.

"Frankie Says Relax"

There has to also be a question over whether Chelsea can regularly match the £18 million profit on player sales reported in 2010/11. In the preceding five years, they averaged £13 million, so this might be a tad optimistic.

Of course, the big one for Chelsea is qualification to the Champions League. This has been a significant earner for the club, but this season qualification looks far from assured. If they do miss out on one of the four places, this will put a massive hole in the Blues’ budget.

That would be the ultimate irony: just as Chelsea seem to be on the verge of meeting UEFA’s FFP target, they fail to qualify for the Champions League. This is the nub of the tricky balancing act for Chelsea, as they strive to improve the club’s financials, while maintaining a squad good enough to perform on the pitch. They have a good chance of succeeding, but, if they fail, it really will be a different kind of blue.

So, Chelsea's revenues have flatlined for four seasons in a row. As you say, a top four finish is not guaranteed this season but, even if Chelsea finish fourth, this will impact on revenue from the PL this season and, next season, would have an even bigger impact on their revenue from the CL.

This season's player amortisation figures are likely to rise, as you say, following not only from last summer's high spending but also from the fact that Torres and Luiz will have their amortisation recorded at full annual amount and not only for five months.

So, this season will see lower revenue and higher costs, excluding 'exceptionals'. Quite how this brings them any nearer meeting FFP regulations is impossible to see, as the loss for this season will rise.

Even if AVB hangs onto his job for the year, there is no guarantee he will last a second year, so the 'exceptional' may continue to be not so exceptional.

Of course, the worst case scenario, that of Chelsea dropping out of the top four or, even, top five, would blast a hole beneath the waterline that no amount of fancy accounting footwork could cover up, as well as making it harder to attract top-class footballers, except at premium prices and wages.

Am I right in thinking Chelsea should earn an increased amount of money on the CL side since both Manchester clubs are out, assuming Chelsea don't get knocked out by Napoli and Arsenal go on to win the competition or something silly ;)

That's a brilliant summary, thanks. It doesn't seem like great progress but the club is moving in the right direction. A question for you, would Chelsea lose more by a) sacking AVB or b) failing to qualify for the Champions League?

Nick,it would cost Chelsea far more to lose out on CL football than sacking AVB. CL football is worth up to £40m and sacking AVB would cost only £10m or thereabouts.

As regards your comment that that club is moving in the right direction, I agree completely. The club is moving downhill - and fast!

The sooner Chelski become history, the better for football, and if sacking AVB adds to their costs for this year, and makes 'exceptionals' become ordinary expenses as they happen year after year, the happier I will be.

I would much rather Arsenal or Liverpool, clubs with a true footballing history, grab fourth place this season than a club which has whored itself out as a plaything of a Russian oligarch.

After Abramovitch bought Chelski, they made the ludicrous claim that they would break even by 2010 and win the CL twice by 2014.

Neither of these fantasies have come through so far, although it is still possible that the latter of the two may happen - but I wouldn't bet the farm on it.

Chelski are an ageing team and not even the return of Jose could do much about that. It would cost several hundred million to rejuvenate the team but only City have the money for that in English football nowadays, particularly as City could afford to go without CL injections whereas Chelski cannot.

Chelski's revenues have barely increased for four years in a row, despite the vastly improved revenues from the Premiership, thanks to the huge increases for overseas rigths.

There was a time when Chelski were vying to be the best or second best team in Europe - now they are only the third best team in London and London is a city which has never won the European Cup!

Obviously, Chelski have no problem attracting managers, as they get paid for three years for only one year's work, or maybe two years' if they win the Double.

Will Gus Hiddink go back to Chelski when AVB gets the sack in the near future? Hiddink hasn't been all that successful in recent years.

That said, Chelski are running out of options for the position of manager.

David Moyes would be a good candidate but he would be far better off taking 'Arry's job at Spurs in due course in the summer rather than taking on the Chelski job in 'the bleak midwinter', were it the case that AVB gets the sack shortly.

A great read as always, tough times ahead for Chelsea for sure, will be interesting to see how it pans out if they miss out of CL qualification this season.

Would love to see your take on this years financials concerning AS Roma. Following the new board takeover by Thomas DiBenedetto, the influx of new players and the somewhat recent announcement confirming the construction of a new stadium by 2014.

Great Stuff! What caused the huge jump in Manchester United's Revenue Growth starting in 2007 vs the rest of the Prem? Chelsea and Man U were pretty equal until then as you stated, but now Man U have over 100 Million more in revenue. Cheers

Nice work SR, just one question, you have said that expenses towards stadium would not be taken into account for FFP, so does it mean that the 15 million or so which Arsenal pay as annual interest on their stadium bonds is out of the purview of the FFP?

Is it possible to do a backward calculation from these figures to determine how much Chelsea can afford to spend on players in the next 3 years before breaking any FFP clauses?(assuming wages remain constant and no players sold)? Not sure any new commercial deals were signed at the start of this season, so maybe we can keep the revenue constant too.

Thanks Swiss for an interesting read, but I can't help feeling that there is a house of cards here, and an increasing need to square the circle. Yes, they will reduce their wage bill over the next couple of years as the stalwarts all gradually disappear. However if you pay less for future talent brought into the club, there is no guarantee that they will be of sufficient quality to maintain a place at the top table. Potentially then you can enter into a vicious circle, with revenue falling. Just a quick look at the figures you present suggests that Chelsea are bringing in anywhere from £60-70m from CL football ie £45m from prize money, plus around £15m from gate receipts, and additional money from sponsorship and tours. Surely new kit and sponsorship deals will be at reduced levels if CL football is absent. Some of the reason for the relatively high amounts for the sponsorship deals is that, with Abramovich in the background, they have been a blue chip team for sponsors. When FFP comes in that's no longer the case, they will have to struggle for CL football like anyone else. All this suggests Chelsea's real turnover, if they were a Europa cup team is around £150m. There is also the massive spends on Luiz and Torres to add in as well. Hmmm!! There maybe trouble ahead....

Would love to see a follow-on piece from you now that Chelsea have recorded a profit. Champions League the factor, as you pointed out it was going to be (although not in the way anyone thought it would be!)

Praise for The Swiss Ramble

"Blogger of the Year 2013 - It’s testament to the effect that Kieron has had on the blogosphere that so many fans take his word as gospel. Putting to use his career in the world of finance, his insights into balance sheets and simple explanations of complex ideas appeal to the hardcore financial whizz and casual fan alike." - The Football Supporters' Federation